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KARACHI, Sept 17: The cut-off on six-month treasury bills went up by 38 basis points on Wednesday confirming all earlier signals from the State Bank that it intends to stabilize the TBs yield to help banks. The central bank had to raise the cut-off yield to 1.65 per cent from 1.27 per cent to sell Rs14.5 billion TBs chasing closely the sale target of Rs15 billion.
The rise in the cut-off yield on six-month bills that serves as benchmark for both inter-bank lending and pricing corporate loans would help banks keep their interest revenue from falling. It would also help them revisit the rate of return on deposits. Weighted average rate of return on deposits of all banks combined fell to just 1.90 per cent at end-June from 4.02 per cent in June 2002 against annualized inflation of 3.1 per cent in fiscal year July/June 2002/03.
SAVERS PLIGHT: But bankers say the increase in the TBs yield does not guarantee that the savers plight would be over. “This will definitely create room for the banks to revisit the deposit rates after a lag of time,” said treasurer of a foreign bank. “But this would depend on aggregate demand for bank credit and overall liquidity available in the market.”
Senior bankers say since the inflow of home remittances has started tapering off liquidity level may not move up as briskly as it did in the past. But they say that an anticipated fall in credit demand as compared to last fiscal year may offset this.
“So it is difficult to say how soon banks would be able to increase the rates of return on deposits,” said head of credit department of a large local bank. “But the banks that need to expand their deposit base would certainly try to improve their deposit rates.” This again will depend on whether such a bank still needs to lower its lending rates to grab its share in the credit pie of the banking system. “If that is the case...then obviously the bank will find it difficult to raise its deposit rates.” At end-June this year the weighted average lending rate of all banks combined fell to 7.01 per cent from 12.17 per cent in June 2002. But the banks made space for this seemingly big rate-cut more through slashing the deposit rate and less through reducing their financial intermediation cost.
Since total deposits of the banking system at end-June this year was around one and a half times the total deposits one percentage point cut in deposit rates should have created room for 1.5 percentage point cut in lending rates. That is why the reduction in weighted average lending rate is normally higher than the reduction in average deposit rate.
